From Nathan's "Lab" Post Election...
From Nathan’s “lab”
Right now the market can best be explained as the tale of two tapes (or cities, if you’re a Dickens fan).
The first group of stocks have driven most of the performance since early 2018. That group benefits from low rates, low inflation, and a strong U.S. dollar. Into this group falls tech stocks, growth stocks, utilities, consumer staples, and homebuilders. The VAST majority of the return in the market has come from this category.
The second group of stocks have been mostly laggards since early 2018. This second group benefits from rising rates, robust economic activity, and a weakening dollar. Cyclical stocks, value, materials, and industrials can all be put into this group.
The last week has been about the push and pull between these two groups. Positive news from Pfizer about a vaccine juiced the group of stocks that benefit from economic activity (Monday and Tuesday’s rallies were primarily the second group). The expectation is that a Biden presidency will lead to some sort of fiscal stimulus, helping the economy to get going again. While this may be true, it is not a foregone conclusion. The Senate still must approve the fiscal stimulus, and thus far they have signaled that they don’t want a multi-trillion-dollar stimulus package. It is most likely that we won’t have the answers until 2021.
Between now and January 20th we will get bits and pieces of news about the progress toward fiscal stimulus. As that news comes in markets will react, and a change in regime may FINALLY happen to bring the long-dead value investor back to life. A resurrection and you'll see some weight added to value positions in our portfolios.
Stay tuned…
Nathan E. Magdanz